CAD

With higher borrowing costs and slowing credit growth inflicting serious pain on Canada’s spectacularly indebted private sector, the economy appears poised for a hard landing. The direction of travel for residential investment is clearly down: after an early-2023 dead-cat bounce, prices and activity levels are subsiding across the country, and developers are moving to the sidelines. Energy prices are well off peak levels, and business confidence has fallen to post-pandemic lows. Per capita household consumption is falling as higher debt carrying costs eat into overall spending levels. Perhaps most critically, the labour market is weakening, with vacancies down about a...

Market illusions about the relative resilience of Canada’s economy have been exhausted in recent months, and swap-implied rate projections for the Bank of Canada and the Federal Reserve have converged in a dramatic fashion. Yield differentials and the loonie have come under sustained pressure, with central bankers on both sides of the border now seen delivering rate cuts at a roughly-similar pace through the course of 2024. Number of Rate Cuts Expected, By Meeting

Over the next month or two, we think economic surprise indices will soften in the United States, with consumer spending and labour market measures weakening relative to still-optimistic market forecasts. Global financial conditions should ease as US yields stabilize, and expected growth differentials should narrow, adding momentum to an already-underway portfolio rebalancing process in major investment portfolios. Against this backdrop, high-beta (growth-sensitive) currencies should broadly gain against the dollar, with the Canadian dollar near the head of the pack. Bloomberg Consensus 2024 Growth Forecast, %